Dynamic supplier selection model under two-echelon supply network

Abstract

With the rise in competition levels and rapid changes in customer preferences, companies feel the pressure to create an efficient and effective base of suppliers in order to achieve the competitive advantage for them. The selection parameters of suppliers do not remain constant with respect to time and moreover; with highly fluctuating market demand, the suppliers are also expected to respond to it dynamically. This paper addresses a specific dynamic supplier selection problem (DSSP) under a two-echelon supply network (TESN) for the decision maker to allocate optimum order quantities to different levels of suppliers. The problem here considers a TESN with an integrated approach where the original equipment manufacturer (OEM) selects the first-tier suppliers and in turn with their opinion decides for the second-tier suppliers. Second-tier suppliers supply raw materials/parts/components to the first-tier suppliers, and then the first-tier suppliers supply the fabricated semi-finished product to OEM. In order to solve such a kind of problem, a mixed-integer non-linear programming (MINLP) is proposed to minimize the Total Cost (TC) of procurement for satisfying the OEM's demand. The problem incorporates parameters relevant to supplier's capacity, lead time, quality level of products, and transportation costs as a function of lead time. The model is validated through two cases with randomly generated data, and sensitivity analysis is conducted through Taguchi method using LINGO 15. This method not only helps to check the robustness of the parameters involved but also to set their optimum level. The analysis shows a significant reduction in the TC of procurement and the effect of each parameter on the TC are finally identified. The methodology adopted here can be extended to other organizations.